Hong Kong Tax News Flash 

In the original draft Bill, the following new sections are proposed to be introduced into the IRO or to be revised:

1. Section 49(1A) is introduced.  This section empowers the Chief Executive to declare any CDTA with disclosure of information concerning taxation matters of another jurisdiction covered by the EoI article of the CDTA have been made and shall be effective.
    
2. Section 51(4)(a) is revised to extend the assessors' power to obtain information in regard to any taxation matter covered by the EoI of the CDTA made according to section 49(1A).
    
3. Similarly, section 51B(1) is also revised to extend the power to obtain search warrant in certain cases in obtaining information in regard to any taxation matter covered by the EoI of the CDTA made according to section 49(1A).
    
4. Provisions related to penalty as a result of failing to provide information or providing incorrect information are revised to include those information covered by the revisions of section 51(4)(a) and section 51B(1).

Please refer to our Hong Kong Tax News Flash, July 2009 Issue 7 for our discussions on these proposed amendments.
  
In additions to the above proposed amendments, the Amendment Ordinance enacted by the Legislative Council has incorporated a few subsequent changes to the original draft Bill gazetted in June 2009.  These changes were proposed by the Hong Kong SAR Government in response to some of the comments raised by the Bills Committee during the deliberation on the Bill, including comments received by the Bills Committee during its consultation with the business deputations, accounting firms and professional bodies.
  
The most important subsequent one is the addition of a clause to the Amendment Ordinance such that a new section 49(7) has now been introduced to the IRO.  Section 49(7) requires Rules made under section 49(6) of the IRO (i.e. Inland Revenue Rules made by the Chief Executive for carrying out the provisions of any CDTA concluded by Hong Kong) to be approved by the Legislative Council.  As the Hong Kong SAR Government is planning to implement the domestic safeguards against the abuse of the EoI article in form of rules to be made under section 49(6) (see discussion in the next section), the introduction of section 49(7) effectively means that those domestic safeguards will be subject to the approval (by means of positive vetting procedure) of the Legislative Council.

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The legislative amendments introduced by the Amendment Ordinance allow the Inland Revenue Department ("IRD") to obtain information necessary for the purpose of exchange tax information with a jurisdiction that has signed a CDTA with Hong Kong with a provision that requires disclosure of such tax information, even though the information may not be required by Hong Kong for its own domestic tax purposes.  As mentioned in our Hong Kong Tax News Flash, November 2009 Issue 11, one of the key concerns expressed by the business and professional sectors is the safeguards that will be put in place by the Hong Kong SAR Government to protect taxpayers' right and to ensure the privacy and confidentiality of the information exchanged.
  
To allay this concern, the Hong Kong SAR Government has issued the draft Inland Revenue (Disclosure of Information) Rules ("IRR") and draft Departmental Interpretation and Practice Notes - Implementation details of exchange of information provisions under Comprehensive Double Taxation Agreements ("DIPN") to assure the public that in addition to the international safeguards that will be incorporated into a CDTA, a protocol or similar instruments, proper domestic and procedural safeguards will also be adopted by the IRD.
  
In addition to the amendments to the Bill, the Hong Kong SAR Government has suggested a number of amendments to the draft IRR and draft DIPN in response to the comments received.  Based on the latest version of draft IRR and draft DIPN available, the more important proposed amendments are:

1. Information to be provided by the requesting party in an EoI request - The information that has to be supplied by the party making an EoI request was originally specified in the Appendix of the draft DIPN but has now become the schedule of the draft IRR and formed part of the subsidiary legislation.  The list of items to the supplied by the requesting party has also been modified;
    
2. No retrospective effect of EoI article - Clause 4A has been added to the draft IRR such that the Commissioner of Inland Revenue ("CIR") may disclose information in response to a disclosure request only if the CIR is satisfied that the information does not relate to any period before the relevant CDTA that are applicable to the request come into operation; and
    
3. More time given for a person to review the information to be exchanged - The time limit for a person to request the CIR to amend the information to be disclosed has been extended from 14 days to 21 days after a copy of the information is given by the CIR.

As mentioned above, Section 49(7) has been introduced to ensure the IRR will receive "positive vetting" by the Legislative Council.

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The Amendment Ordinance gazetted on 15 January 2010 will not become effective until a day to be appointed by the Secretary for Financial Services and the Treasury by notice published in the Gazette.  It is the Hong Kong SAR Government's plan that the Amendment Ordinance will only come into operation after the approval of the IRR by the Legislative Council.  At the time of writing, it is not yet known when the positive vetting procedure on the IRR will commence at the Legislative Council but we hope that will happen with the minimum of delay.

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Balance between effective implementation of EoI and protection of taxpayers' rights
  
We welcome the above amendments to the Bill and the draft IRR suggested by the Hong Kong SAR Government.  The amendments will provide added legal protection to the person(s) concerned in an EoI request and impose additional check and control on the administration.  For example, setting out the information that has to be provided by a requesting party in an EoI request in the IRR instead of the DIPN means that if the administration wants to make any future amendment to the information required, it has to go through the legislative process of amending a piece of subsidiary legislation rather than simply revising the DIPN administratively.  Unlike other subsidiary legislations which usually require negative vetting, the IRR requires positive vetting by the Legislative Council.
  
Nevertheless, we also note that some of the requests / suggestions from the business and professional sectors have not found their way into the current draft IRR and draft DIPN.  For example, the administration remains of the view that it is not necessary to have an independent body to review the IRD's decision on amendments of information disclosed, and that the review to be conducted by the Financial Secretary of the IRD's decision should be limited to the factual correctness of the information only.  As a result, if a person thinks that the information disclosed by the IRD is outside the scope of the relevant DTA or the law, the person can only challenge the IRD's action by bringing the case to the court through judicial review.  We also note that clause 4(c) of the current draft IRR empowers the CIR to permit an EoI request to contain particulars less than those set out in the schedule of the draft IRR.  This could effectively void the legal protection provided by the schedule.
  
It remains to be seen whether the notification and appeal system as well as the other safeguards proposed by the administration can be satisfactorily enforced in dealing with future EoI requests.  It is crucial for the Legislative Council to continuously monitor the implementation of these safeguard measures to protect taxpayers' rights.  In this regard the administration has agreed to report to the Panel on Financial Affairs of the Legislative Council on the effectiveness of the proposed notification and appeal system within 18 months after its implementation.
  
The next step ahead
  
Upon coming into operation of the Amendment Ordinance, Hong Kong will be able to adopt the latest international standard on EoI in concluding a CDTA with other countries.  This is critical not only for Hong Kong to expand its treaty network but also for Hong Kong to fend off the accusation that it is a non-cooperative jurisdiction.
  
As reported in our Hong Kong Tax News Flash, November 2009 Issue 11, more concrete counter measures against non-cooperative jurisdictions could come into place as soon as in early 2010 and sanctions that could hurt investment and economic activities has become a real threat rather than a hypothetical risk.
  
For example, one of the latest developments is that France has enacted the Amended Finance Act for 2009 which contains a set of punitive tax measures against the so-called "Non-cooperative States or Territories" ("NCST").  These new rules entered into force on 1 January 2010, although a grandfathering / transition period may apply to certain provisions.  A wide range of counter measures have been introduced by the new rules, including: increased withholding tax rate on passive income for operations with an NCST; disallowance of tax deduction for payments made to an NCST (with a safe harbour provision in some cases); and no offsetting in France of the foreign withholding tax borne by an entity located in an NCST under the controlled foreign corporation regime.
  
The changes to the IRO will open or reopen the CDTA negotiations between Hong Kong and other countries, for example France and Ireland.  More importantly, this will reduce the chance of Hong Kong being labelled as a non-cooperative jurisdiction and facing sanctions imposed by the international community.  Thus, it is imperative that swift actions be taken to finalise the draft IRR and to complete the legislative process of bringing the Amendment Ordinance into operation.  Only until then can Hong Kong speed up the conclusion of those CDTAs that have been put on hold because of the EoI issue and attain 12 or more treaties / agreements with the international standard of EoI, a threshold set by the OECD for being regarded as a compliant jurisdiction.

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